What exactly is professional indemnity insurance?
Professional indemnity insurance is a form of cover that is specially designed for businesses and individuals who provide professional services to their clients. Errors can be costly and if you make an error or an omission while providing advice or service to a client and that error winds up having a detrimental effect on your client, you could be liable to pay damages. The loss does not have to be strictly monetary but could be material, physical or financial. If someone initiates a lawsuit against you claiming you have breached your professional duty, you could find yourself having to fight an expensive and protracted legal battle. You still have to defend yourself even if the allegations are untrue and then there’s the prospect of paying out compensation to consider.
What is the Importance Professional Indemnity Insurance?
Insurance is a major concern for businesses of all shapes and sizes, with cover for everything from fire and storm damage to public liability seemingly paramount. With this in mind, why is professional indemnity insurance such an important form of cover? Quite simply, this form of insurance protects professionals whose job requires them to provide advice or services to their clients. Unfortunately, all it takes is one mistake or one disgruntled customer to turn the successful business you’ve created on its head. If people rely upon your expertise, you have a professional duty to act in their best interests, but if you breach that duty someone may make a claim of negligence against you. Of course, defending yourself against such claims is often quite difficult. As well as being costly and incredibly stressful, it can also be a time-consuming process that takes you away from the important duties of running your business. This is why professional indemnity insurance is such a good idea for many professionals. It’s a mandatory requirement in some professions to satisfy government regulations or contract terms, while for any business that takes it out it offers vital protection of assets.Back to top
Who can make use of a Professional Liability Insurance?
As mentioned above, if you work in certain industries you are required to have a professional indemnity policy in place to satisfy government regulations, though sometimes these can differ depending on the state or territory you live in. In other professions, it might be necessary to have this form of insurance cover in order to be eligible for contract work. However, even if it’s not technically required, professional indemnity insurance is still essential for a wide range of professionals. Anyone who offers professional advice or services to their clients could make an error that causes a client to suffer a physical, material or financial loss and is therefore at risk of being sued for breaching their professional duty. A list of professions for which professional indemnity insurance is essential includes:
- Structural engineers
- Public relations consultants
- IT consultants
- Real estate agents
- Health care providers
- Education consultants
- Personal trainers and fitness consultants
- Financial advisers
What kind of Protection does a Professional Indemnity Insurance Provide?
A professional indemnity insurance policyholder receives a wide range of protection. If you cause loss or damage to one of your clients by failing to perform your professional duty, a claim could be made against you and you could find yourself the subject of legal action. Professional indemnity insurance policies feature a limit of indemnity, which is the maximum amount an insurer would be required to pay out in the event of a claim. The cover available will vary from one policy to the next but it will generally include legal consultation and court attendance costs, as well as cover for contractors. If you are legally required to pay damages to a third party, your insurance claim can cover this, too. Many professional indemnity insurance policies also include an option to cover public relations costs. These can be vital in helping to re-establish the reputation and position of your business in the eyes of the general public. Check with insurance providers for detailed information of what their professional indemnity insurance policies will cover.Back to top
Understanding Professional Indemnity Insurance Claims
Under a professional indemnity insurance policy, a claim describes a situation where a third party makes a demand or notice against you to compensate them for a loss you caused. This can be in verbal or written form, and it’s important to note that professional indemnity policies are offered on a ‘claims made’ basis—this means the policy that will provide cover is the one that is in force when a claim is made against you, not the policy that was in force when the events that led to the claim originally occurred. A wide range of incidents and events can result in a claim. These include:
- If you lose a client’s important documents
- If a third party accuses you of libel, slander or defamation
- If you offer wrongful or insufficient advice to a client
- If you or your employees perform an act, error or omission that results in a third party suffering a loss
- If you fail to act according to instructions from a client
- Your failure to advise a third party
- If you engage in misleading or deceptive conduct, such as if you breach Fair Trading legislation
- If you breach a statute.
Speak with your insurance provider for a comprehensive list of those claims you will be covered against. Professional indemnity insurance is a vital form of cover for people who work in a wide range of occupations. Whether you’re an accountant, an architect, a public relations consultant or a personal trainer, you may need the protection that professional indemnity insurance provides. Assess the risks your business is exposed to determine what type of cover and how much cover you need. Compare policies online at finder.com.au, obtain quotes from multiple insurance providers, and seek expert advice from an insurance broker if you need assistance finding the right policy for you and your business.Back to top
Professional Indemnity Insurance Frequently Asked Questions
I no longer run a business do I need professional indemnity insurance?
It is not unusual for claims to arise against businesses years after the actual service has been provided. For most types of services, claims can be made up to 5 years following, though this can vary according to different legislation regulating different service/industries. Run Off cover is a professional indemnity insurance option that provides cover against claims that come into effect after the professional and/or business has stopped trading and will cover work done prior to the run-off cover being taken out.
Can an employee buy professional indemnity insurance?
Employees should be covered under their employer's professional indemnity insurance. In the event that the employee decides to undertake work that is independent of their employer, they will need to take out their own cover for that work. One such example is an architect working for a firm that undertakes work for a client independently from their architecture firm. Similarly, an architect that works for a non-architecture business will be required to take out his or her own cover. In any event it is wise for employees to review their companies professional indemnity insurance to know exactly what they are covered for and if they need to purchase individual cover.
Can you claim on professional indemnity insurance if convicted?
In the event that the insured is found guilty of neglect, the insurer will pay for the compensation to the client to the maximum limit stated in their policy. Any amount that surpasses this limit will need to be made up by the insured.
How much professional indemnity insurance should I have?
There is no clear-cut answer to how much professional indemnity insurance a business requires, as it will vary greatly between businesses and the service that they provide. In assessing an adequate level of cover, the following will need to be considered:
- Level of cover required by legislation for the service provided
- Nature of service provided and likelihood of a claim
- Number of employees in business and related parties
- Potential financial loss that may be suffered
- Level of loss that insured is willing to be exposed to and manage through risk control and risk transfer
- Type of policy and additional cover options such as public/product liability and run-off cover that the insured applicant includes on the policy.
Is professional indemnity insurance tax-deductible?
As a general guideline provided by the Australian Tax Office, insurance premiums may be tax-deductible if it can be shown that the insurance relates to the policy owners ability to earn assessable income. As such, professional indemnity insurance premiums are generally tax-deductible. It is worth any professional and/or organisation to check the tax-treatment of their cover with a tax professional.
How is misleading and deceptive conduct recognised under professional indemnity insurance?
Professional Indemnity Insurance will provide cover for misleading or deceptive conduct as recognised under the ASIC act of 2001. ASIC recognises misleading or deceptive conduct as, “A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.”Back to top